As Jinsan has pointed out it might have been that the .htaccess was not written to.

Try and re-create the permalinks again but this time download your .htaccess file and see if WordPress was able to insert all the bits into there. If not just copy and paste the code from the permalink page into your .htaccess, upload and all should be fine!

I just switched on permalinks myself but am using index.php as the basis for it as I did not want to use .htaccess

I had the same problem, turned out wordpress didnt replace the info in the .htaccess, but just added info again and again. After i manually removed all the wp-related info in the .htaccess file, and then let wp rewrite it, it did work.